One of the most important things a possible homeowner should know is the kind of mortgage available. Knowing how one mortgage type differs from the other is making the right and sensible decision for home financing. Mortgages after all, require a level of commitment that stretches on for years.
Here are the following options that are available in the market:
- Fixed rate mortgage
This is the most popular option and this makes a hefty 75 percent of all home loans. Its most notable feature is that its interest rates remain constant throughout the term of the loan.
The terms are often offered in 10, 15, to 30 year options with the 30 year option being the most popular. However, it should be noted that the 15 year mortgage term builds equity much faster.
Most homeowners go for this type of mortgage as they will know exactly when the interest and the principal payments will be for the duration of the term. This makes budgeting easier as this eliminates fluctuating interest rates in the future. This certainty however comes at a premium as fixed interest rates are usually higher.
- Adjustable rate mortgage
As the name suggests, adjustable rate mortgages have rates the change from time to time. Usually, the rate will change every year after a time where the interest rate is fixed. This is the reason why it is called a hybrid product. A good example is the 5/1 adjustable rate mortgage. Simply put, the loan carries a fixed rate for the first five years, and after that the rates begin to adjust every one year. For this mortgage, the rule of thumb is clear: the longer the duration of the loan at a specific rate, the more expensive the loan. This is highly recommended for homeowners who have no plans to stay for too long in the property they purchase.
Among its advantages, ARMs usually have initial interest rates that are lower compared to fixed rates mortgages. That is why it is more affordable as monthly payments are lower. Lenders also have a cap on the highest interest rate that they can charge.
Given its nature however, ARM’s interest rates can be fairly unpredictable and rates usually have one direction to go: up.
- Jumbo loans
A jumbo loan is a good choice for homebuyers looking for a large purchase. This is available for real estate purchases that are primary residences, vacation homes, luxury properties, and investment purchases. The limits to this loan are set at a very high minimum standard. Starting at more than $400,000 to as high as $625,000, the requirements for a jumbo loan are equally steep. Some lenders will require 2 appraisals, along with a debt-to-income ratio of at least 43 percent or less, a credit score of 700 or higher, and 6-12 months of financial reserves.
Government insured loans
- Federal Housing Administration Loans (FHA)
This mortgage insurance program is managed by the Department of Housing and Urban Development. This program allows for down payment for as low as 3.5 percent of the purchase price.
There are limits and strict requirements to avail of this loan. Among them include upfront mortgage insurance premiums and ongoing annual premiums, and a limit on the loan itself which will depend on the cost of the housing area.
However, this is an excellent program to avail for people who do not qualify for conventional loans, such as buyers with low to moderate income, low credit scores, and a history of bankruptcy.
- VA Loans
This is meant for military service members and their families and is available through the U.S Department of Veteran Affairs. Through a VA loan, borrowers can receive 100 percent financing for the purchase of their home at no down payment whatsoever.
However, to be eligible for a VA loan, one must meet the utmost of requirements. And the loan itself may be limited. It should also be noted that the loan is only applicable for the purchase of a primary home. It is not applicable for a vacation or investment property.
- USDA/ RHA Loans
This is offered by the United States Department of Agriculture and is managed by the Rural Housing Service. This loan is best for rural residents who have a low or modest income, and are not able to obtain housing through conventional means. Given the nature of the program, this loan is specifically for eligible rural areas as defined by the USDA.